The recent slowdown in capital investment in China's technology sector has highlighted the complexities Beijing faces in its attempt to challenge U.S. technological hegemony. In a significant move, several local administrations have been urged to disclose their financial ties to startups such as Dreame Technology, the world leader in robotic vacuum manufacturing. This policy shift underscores the central government's effort to balance support for innovation with the need to avoid fiscal waste and credit risks.
Local authorities, in an attempt to attract investment, have adopted a co-investment model that has led to unfettered competition between regions, generating considerable waste of resources. Dan Wang, director of Eurasia Group in China, points out that this race to attract companies can result in a misallocation of resources, which could jeopardize the country's public finances.
The expansion of Dreame and the role of state capital
Dreame, founded in 2017, has grown rapidly, diversifying into sectors such as electric vehicles and humanoid robot technology. However, its expansion has been largely driven by state capital. A venture capital fund managed by the company has assets worth 41.6 billion yuan, of which approximately 80% comes from local government funds. This dependence on state capital raises questions about the sustainability of its business model and the ability of local administrations to properly evaluate investments.
The recent decision by China's State Council to implement new guidelines restricting the creation of investment funds by local governments is an attempt to consolidate control over investment in the technology sector. This measure is expected to curb the proliferation of duplicate funds and wasted capital, a phenomenon that has characterized the approach of many Chinese cities in creating technology companies.
The government's financing structure, although criticized for its inefficiency, has allowed some Chinese technology companies, such as Nio and CXMT, to become champions of innovation. However, this model has also been described as a "spray and pray" approach, which produces a large volume of economic activity at the expense of a high failure rate. This cycle of mobilization towards national priorities and subsequent course correction reflects the realities of Chinese industrial policy, where ambitions are vast but results can be disappointing.
As Beijing intensifies its control over investment, local administrations are likely to face increasing pressure. If investment funds are reduced at the county level, options for driving economic development will be limited, which could affect the ability of these regions to compete in a rapidly evolving global market.
